China’s Pivot to Putin’s Friends

The Moscow-Beijing partnership is stalling. But Xi is winning over the Russian president’s inner circle with favorable loans and sweetheart energy deals.

When Gennady Timchenko — a Russian oligarch and close friend of President Vladimir Putin — was appointed chair of the Russian-Chinese Business Council, an association of more than 100 Russian and Chinese corporate players involved in bilateral trade, the longtime businessman cemented his role as the Kremlin’s point-person on China.

That same year, during Putin’s May 2014 visit to Shanghai to sign a massive $400 billion gas deal, the Russian president introduced Timchenko to Chinese President Xi Jinping as “our man for China.” Since then, Timchenko has been at the forefront of Moscow’s push to shore up economic ties with China, primarily centered on energy deals.

But more than two years after the watershed energy deal, the Kremlin’s so-called “pivot to China” has stalled. Chinese firms have been reluctant about investing in new Russian energy deals following the fall in commodity prices in 2015 and China’s own economic slowdown has seen GDP growth drop from 10.3 percent in 2010 to 6.9 percent in 2015. This has led to growing disillusionment among the Russian elite who had hoped that China might replace Europe as its top energy customer, leaving the Kremlin’s turn to Asia hanging in the balance.

It’s against this bleak backdrop that Putin will travel to Beijing on June 25 for a three-day visit to meet with Xi and discuss the future of Beijing and Moscow’s relationship, where they are expected to talk about bilateral trade, how to deal with an erratic North Korea, and “One Belt, One Road” — a massive infrastructure project championed by Xi to revive to the old Silk Road trade route.

But beyond the pomp of Putin’s visit, a different aspect of the Russia-China relationship is unfolding on the sidelines. Timchenko and a small set of elites from Putin’s inner circle have been the recipients of a series of multibillion-dollar sweetheart deals from Beijing designed to keep Putin’s clique both happy and looking east. China doesn’t look ready to invest heavily in Russia anytime soon — Russian-Chinese bilateral trade plunged from $95.3 billion in 2014 by 28.6 percent to $63.6 billion in 2015, just 1.5 percent of China’s international trade that year. But Beijing has realized that winning allies among the small group of Putin’s friends is a good way to influence the Russian president’s judgment — and keep a secure source of cheap hydrocarbons and sophisticated weapons close-by.

Timchenko — with an estimated net worth of $13.4 billion largely made in the energy sector and one of the few men believed to have Putin’s ear — is a key player in this strategy deployed by Beijing. While Chinese companies have approached investing in Russia with a cold attitude, such as the stalled Udokan copper mine and Vankor oil field projects, Timchenko has been linked to energy deals in Russia with Beijing on very favorable terms.

One such deal involved SIBUR, the dominant player in Russia’s lucrative petrochemical sector and a company co-owned by Timchenko, and Sinopec, a Chinese state-owned company and the country’s largest oil refiner. In December 2015, SIBUR sold 10 percent of its shares for $1.3 billion to Sinopec, earning Timchenko and other shareholders a welcome payday. Investing in SIBUR was particularly strategic by Beijing when considering that the company’s shareholders include Leonid Mikhelson, whom Forbes called Russia’s richest man, and Kirill Shamalov, who is Putin’s son-in-law.

Timchenko and Mikhelson have also been involved in facilitating other China deals in Russia. In March 2016, the two oligarchs sold a 9.9 percent stake in Yamal LNG, a natural gas project in the Russian Arctic, to China’s Silk Road Fund, a $40 billion fund established in December 2014 to finance One Belt One Road, for $1.2 billion. Moreover, in April 2016, both oligarchs took out $12.1 billion in long-term loans for Yamal LNG from China’s two political banks, the Export-Import Bank of China and the China Development Bank, at very favorable interest rates.

Such complimentary deals raised eyebrows among Russia watchers. Sinopec and the China Development Bank have been at the heart of an anti-corruption campaign Xi launched in 2013 to clean up the image of Chinese firms, and have recently been very conservative about their overseas investments. This is even truer for minority stakes in energy projects, particularly after the collapse of oil prices. Moreover, Timchenko and Yamal LNG were included on the U.S. sanctions lists in March 2014 following the annexation of Crimea, making them risky business partners for a bank, as BNP Paribais, which was fined in July 2014 for violating U.S. sanctions on Cuba, Iran, and Sudan, can attest.

And while Beijing has pursued Putin’s inner circle to cement Russia’s turn to the east, Putin and Xi’s relationship has blossomed too. It’s well-known that Putin, a former KGB operative, attaches great importance to individual diplomacy, preferring to rely on a friendly personal relationship with other leaders to build stronger country-to-country ties. But with figures like former German Chancellor Gerhard Schröder and former Italian Prime Minister Silvio Berlusconi no longer in office, and once-close links to German Chancellor Angela Merkel and Turkish President Recep Tayyip Erdogan destroyed by the ripple effects of the wars in Ukraine and Syria, Xi remains the only world leader of a major country that Putin can call a friend. Putin is arguably also the foreign leader with whom the Chinese President gets along with best. According to Russian and Chinese officials who spoke on the condition of anonymity, the two 63-year-old leaders’ became friends on Oct. 7, 2013, as they met on the sidelines of the APEC summit in Bali. It was Putin’s 61st birthday and the last meeting of the day for both leaders, which quickly turned into a private birthday party with celebratory toasts by Putin, Xi, and a few close aides.

But how far favorable business deals and birthday toasts can go in masking unfulfilled promises of win-win economic cooperation remains to be seen. Despite volumes of crude oil deliveries from Russia to China increasing by 33.7 percent, few benefits have been delivered. Russia has only managed to attract $560 million in foreign direct investment from China, less than 0.5 percent of China’s total outbound direct investment in 2015 and much less than the $4 billion in Chinese investment Russia received in 2013, before the Ukraine crisis. The biggest bright spot is that loans from China to Russia totaled $18 billion in 2015, making China the largest source of external financing that year, according to the Russian Central Bank. But even that is still a far cry from $261 billion that Russia was able to attract from the European Union and the United States in 2013, up until the Ukraine crisis.

Moscow is also divided on anchoring itself so firmly to China. The Kremlin has long seen Central Asia as its backyard, but China’s growing economic clout has dwarfed Russia’s in recent years. Beijing’s One Belt, One Road is undermining Russian influence in the region and edged out a Moscow-led economic project, the Eurasian Union, in the process. Beijing is certainly a much-needed partner for Moscow, but China is also a powerful competitor.

Despite this far from rosy picture of cooperation, Beijing’s cost-effective strategy of winning over the Russian president’s friends appears to be working, as Putin is believed to be discussing a long proposed free trade zone between Russia and China with Xi during his visit. The proposal has long been met with resistance in the Kremlin, but given Russia’s dire need for investment to mitigate its economic pain, Putin is looking more bullish on China than in the past. Whether Beijing can actually bring the Russian economy any financial relief is still uncertain, but in the meantime, Putin’s friends like Timchenko appear to be the major winners from the Kremlin’s “pivot to China.”

Photo credit: HOW HWEE YOUNG – Pool/Getty Images

Alexander Gabuev is senior associate and chair of the “Russia in Asia-Pacific” program at the Carnegie Moscow Center. Follow him on Twitter: @AlexGabuev